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The Challenge of Transferring Pension Risk

General Motors’ Alfred Kibe talks about the company’s groundbreaking transaction with Prudential.

Alfred Kibe, director of capital planning and pensions funding in the treasury Department of General Motors, says he is driven by the idea of challenge. It certainly had to be challenging for this Kenyan native, who earned a degree in electrical engineering at the University of Nairobi, to switch specialties and cross the globe to go for an M.B.A. in finance at the University of Pennsylvania’s Wharton School of Business. Kibe says General Motors gave him even more opportunities to challenge himself as the company’s program of rotating people in and out of positions had him managing bank relations, business development, auto finance and most recently capital planning and pension funding.

It was this latest assignment, Kibe says, that has been his greatest challenge. He recently led the negotiations to transfer some $26 billion in GM pension obligations to salaried employees into a lump sum and annuitization transaction with Prudential Insurance. The deal, completed on Nov. 1, is the largest such pension risk transfer on record and represents a huge reduction in pension liability risk for the world’s biggest automaker.

What was it GM did with the pension risk transfer? We have a company that has about $130 billion in pension obligations, so any movement in interest rates generates enormous risk to our liabilities that can then flow through to the company’s P&L. The challenge was to reduce that risk in a way that works first for the retirees and second for the company. We had to leave the retirees in at least as good a position as before the change. The cost to GM was $2.6 billion on a cash basis, though after factoring in certain administrative savings, the net cost was $2.1 billion.

What was the key to the deal’s success?The concept of a pension risk transfer was not new. These kinds of things had been done before, but never on this scale. Over the last 20 years, there have been many deals, but the total was in the $1 billion range. This was a $26 billion transfer. We found a company, Prudential, that was interested. But we had to complete the whole transfer in a way that would not expose the company to market risk between the time we announced the plan to shift the risk and the time we finalized it, which was a period of about five months. I can say that was a period of time during which we were closely monitoring markets.

Does GM’s transaction open the door to more big pension risk transfer deals?It is already happening. Verizon has gone ahead and recently announced a similar transaction, about one-third the size of what we did. And CFOs and treasurers are looking at our transaction to see if it could make sense for them. But it will be different for each company. Many of our peers have been reaching out to us to ask about it. There is also a lot of interest among insurance companies. It’s a natural hedge for their life insurance business—sort of a giant annuity. With life insurance you pay people when they die, and with this pension transfer, you’re paying people while they’re alive.

Before your current assignment, you ran consumer financing. Did that experience help you with your current challenge?Sure. In my prior assignment, we worked to put in place agreements with banks in North America during the fiscal crisis that would service our prime customers. Then in 2010, with the acquisition of AmeriCredit, now known as GM Financial, a captive finance unit, we were able to handle our subprime and leasing customers. What I learned in that work is that if you have the right team of people, you can solve your problems. In the case of the pension risk, we started out with a goal of transferring the risk. We weren’t sure there was a way to get it done, but working together with people at Prudential, we were able to put together a structure that worked for both sides.

What has been the key to your rapid career climb since graduating from the University of Nairobi in 1998?The biggest thing is building relationships. I haven’t had a formal mentor, but throughout my career, I’ve cultivated relationships at all levels—both with senior people and with peers—and over time, those relationships have helped me build my career.

The other thing is I’ve always sought out challenging situations. GM has been good for that. With their structured rotational program, we get to take on a lot of responsibility within a relatively short amount of time. I’ve been very glad to be a part of this.

Has your electrical engineering training been of any use in your career in corporate finance?I sure hope so! I worked hard for that degree. And actually, some of the analytical skills I picked up in engineering school are transferrable to finance: the critical thinking skills and the ability to break things down into smaller pieces.

Do you have any advice for people who want a career in corporate finance?Seek out opportunities that help you to find challenges, and build relationships.

Are there any skills that you are still working on?Sure, many. One of the challenges for us in finance is having the ability to “dumb down” our analyses to make sure that whatever we are communicating to people outside of finance is less technical and easy to understand. It’s something I continuously work on, to make sure I’m effective and can explain things.

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